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  • Alameda Research borrowed billions of dollars in customer funds from the FTX exchange.
  • The firm’s liabilities were then covered by an alias in FTX.
  • Caroline Allison and Gary Wang pleaded guilty to multiple counts of fraud.

The “where did the money go” case is starting to unravel for crypto exchange FTX.

On November 11, exchange founder Sam Bankman-Fried filed for Chapter 11 bankruptcy protection for FTX and about 130 related companies. The decision came after a wave of exports left the bourse illiquid.

Bankman-Fried arrived on US soil on Wednesday after being extradited from the Bahamas. The Associated Press reported on Friday that a US judge has kept secret that two of his former colleagues, Alameda CEO Caroline Ellison and FTX co-founder Gary Wang, have pleaded guilty to fraud charges and are cooperating with the feds. Prosecutors feared that Bankman-Fried would fight extradition if he learned that his associates had turned against him.

Alameda Research, a trading and investment fund created by Bankman-Fried, had taken billions of dollars out of the stock market, losing it through a series of bad deals and trades. Later it turned out that the money was generated from customer deposits.

The suit, filed Dec. 13 by the Commodity Futures Trading Commission, alleges that Bankman-Fried directed FTX executives to transfer about $8 billion in Alameda’s liabilities to an undisclosed customer account on FTX’s systems.

The lawsuit also alleged that Bankman-Fried would later refer to the account as “our Korean friend’s account” and/or “the strange Korean account.” It added that although it was a sub-account of Alameda, it did not have the investment firm’s typical email identifier of “@alameda-research.com”. In the notes associated with the account, it is labeled as “FTX fiat old”.

The suit alleges that this helped mask Alameda’s negative balance in FTX. However, the account had the same privileges as Alameda accounts, including exemption from liquidation specifications.

A day later, on December 14, Bloomberg reported that a GitHub account named Nishad Singh, a former director of engineering at FTX, had created code that would hide Alameda’s ballooning liabilities on the exchange.

The FTX explosion sent shockwaves through the crypto community. A few months before its downfall, Bankman-Fried assured investors that the worst of the crypto market’s liquidity crisis was probably over. He added that he still has “several billion” on hand to support struggling companies, which could further destabilize the digital asset industry.

Bankman-Fried walked out of a New York federal court on Thursday after being released on $250 million bail.

On December 18, Ellison pleaded guilty to seven counts of federal fraud charges, including conspiracy to commit wire fraud against FTX customers and money laundering. He could face up to 110 years in prison, but agreed to cooperate fully in exchange for a lesser sentence.

Wang pleaded guilty to four counts of similar charges. He faces up to 50 years in prison and has agreed to cooperate with the feds.

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